Buy Phoenix Mills; target of Rs 255: Motilal Oswal

“Phoenix Mills' (PHNX IN) 1QFY13 standalone results were in line with estimates. Standalone revenue from core operations (post adjustment against new accounting policy) grew 13% YoY (flat QoQ) to INR533m (+electricity changes of INR93m) v/s estimate of INR536m. EBITDA was up 19% YoY (8.5% QoQ) to INR394m led by better margins (74% v/s 68% in 4QFY12 due to certain cost provisioning taken). PAT grew 12% YoY (12% QoQ) to INR306m owing to by (1) lower depreciation (declining impact of WDM method), and (2) lower interest expense (amortization impact ended in 4QFY12). Market City projects are steadily transforming into next growth driver for the company with (a) retail assets ramping up, and (b) monetization of Phase II underway strongly.”

“Incremental leasing has been visible in Bengaluru and Chennai malls. All three operational malls (Pune, Kurla and Bengaluru) have ramped up to 60- 70% occupancy levels and witnessing encouraging consumption growth. Bringing certain change to earlier plan of buying out Kshitij's stake in Chennai Market City alone, PHNX board has approved a proposal to buy out the stake jointly with Sharyans Resources (JV partner with 31% stake). PNHX will hold 50.01%/50% in Classic Mall/Classic Housing post completion of the transaction. We understand that the consideration of INR1.06b will also be divided with PNHX 's share at INR619m. Consolidated net debt increased to ~INR14.9b, on account of drawdown of debt at Shangri-La hotel.”

“With encouraging ramp-up in Market City projects, we expect these assets to stabilize over next 2-3 quarters, leading to sharp growth in rental income from INR1.8b in FY11 to INR3.9b in FY14. Strong sales at Phase II of Market City projects lends cushion to address leverage pressure, which is likely to peak out by 2QFY13. We believe continuous stake increase in Market City projects is a key positive as these stabilizing assets would offer meaningful upside going forward. Key triggers for the stock would be (1) leasing momentum and operational ramp-up at Market City SPVs, (2) de-leveraging, and (3) value unlocking from Phase IV at HSP, where an increase in FSI could lend further upside. The stock trades at FY13E P/E of 13.4x, P/BV of 1.5x, and 35% discount to our NAV. Maintain Buy,” says Motilal Oswal research report.

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